There are plenty of ways to earn a second income these days. Some of us get a second job, some of us go down the buy-to-let route, and many of us invest in stocks and shares.
When we talk about earning a second income, those of us more familiar with investing will naturally think about dividend stocks. These are companies that look to reward investors by sharing profits directly with them through payments during the year.
However, if we’re starting investing and we’ve only got say £5,000 in our account, we need to recognise that investing in dividend stocks — which at best provide yields of 9% — won’t provide us with a substantial second income.
Instead, we need to focus on building a much larger portfolio over time. And if I’m looking for growth, I’d be looking for growth-oriented stocks, and not mature dividend stocks. So here’s how I’d invest today for a second income in the future.
Current trends
One of the most interesting trends at this moment in time, for the investing world at least, is rising day-rates in the shipping industry. And that’s why I like tanker firm Scorpio Tankers (NYSE:STNG).
There are several factors at play. During the pandemic vessel and crew numbers fell, and now demand is surging.
But more recently, we’ve seen trouble near the Gulf of Aden — more specifically the Bab el-Mandab Strait.
And this means vessels, predominately travelling between Asia or the Middle-East and Europe, have taken a 30% longer route round the Cape of Good Hope.
So with limited supply, surging demand, and ships having to travel further to get to their destinations, day-rates are surging. These have also been positively impacted by the drought affecting the Panama Canal.
Of course, the tanker market can always go into reverse. And that’s a risk worth bearing in mind. However, Scorpio stock looks particularly attractive at just 6.9 times forward earnings.
Buying growth
Celestica (NYSE:CLS) shares jumped on 30 January following another earnings beat by the supply chains solutions company. It was the fourth time that earnings had beaten expectations in 2023.
However, this stock still looks like good value despite the surging share price. My favourite metrics is the price-to-earnings-to-growth (PEG) ratio. It’s an earnings ratio that is adjusted for growth, with a value of one suggesting fair value, and anything below suggesting undervalued conditions.
Celestica has a PEG ratio of 0.73, inferring that it’s still significantly undervalued. This metric is calculated by dividing the forward price-to-earnings ratio by expected growth (three-to-five years). And given the company’s positive outlook for Q1 2024, analysts may upgrade their outlooks.
A slowing North American economy could derail the company’s growth. That’s something I should be aware of. But to date, the US economy has been incredibly strong, and the company’s own outlook is improving.
The bottom line
As noted, I believe these two companies could outpace the index average. And that could allow me to turn my small portfolio into a much larger one. One capable of generating a sizeable second income.
